The 7 Questions You Need to Ask Before Buying a Fractional Ownership

DO YOUR DUE DILIGENCE

BEFORE YOU BUY

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1. Who is the Developer?

Before you entrust your money to someone, check out their experience and track record. It may sound like common sense, but many people are swayed by a slick website with fancy graphics and photos, without a clear understanding who they are dealing with. Does the developer have the legal, technical and financial strength and experience to complete the project as presented? What is their track history? Do they provide the ability to speak with past clients? These are important questions to ask.

2. What are the annual costs of ownership?

As a part owner, one would reasonably expect that annual operating costs would bear a close relationship to the annual assessments. Of course, if concierge and hotel-like perks are part of the package, this can raise the annual costs dramatically. Look at the true per diem cost of ownership (annual fee divided by number of days use) to determine if this is truly a good value. See if these costs are disclosed publicly on their website. If they aren’t, there may be a reason.

3. Who manages the property and at what cost to the owners?

Some developers encourage and train the owners on self-management; others have a management contract with sister companies. This is profitable for the developer, but not always a good deal for the owner. Find out ahead of time what the annual costs of management are, and whether the management contract is able to be canceled or renegotiated.

4. How much markup does the Developer charge?

Most developers do not like to disclose their profit margins, sometimes for good reason. It is not reasonable to expect a Developer to work for free, nor to expect that a fractional interest of a property that has been completely renovated and furnished, is somehow the same as the market value of the same apartment times that percentage. It costs a lot of money to find, acquire, renovate, furnish, market and complete a fractional project.

Having said that, Paris property prices per m2 are published every quarter and are well known in the local industry, down to each neighborhood. Anything over 140% of current market value divided by the number of shares is, in my mind, excessive. Some developers have a markup in excess of 300%. (4 times market value). What can I say, except that, when it is time to sell, knowing this information before you buy can mean the difference between enjoying a profit and taking a major financial hit. The real estate market is not kind to overpriced property.

5. What is the legal structure of the Project?

Ask this question upfront if it is not disclosed. Buying a property in a foreign country is fraught with risks and complexities. A simplistic legal structure may be easier to understand, and inexpensive to form, but could be extremely costly down the road. Remember, France is not particularly friendly to foreign companies as a general rule, and foreign companies that do business in France without the annual filing of required disclosures and payment of any requisite taxes are dealt with particularly harshly.

6. Does the Developer offer a rental program for unused time?

This is a harmless question if the property is located in the US, but a deadly one if the property is located in France. All I can say is, if the Developer is not aware of, or ignores French law pertaining to rental of property, it is the Owners that will pay the consequences. See my commentary in the FAQ section of this site.

7. Can I reasonably expect to use the time that I have purchased?

The whole reason behind fractional ownership is that you can purchase just the amount of time that you would reasonably expect to use. Don’t buy more time than you need, and never buy excess time for the possibility of rental income.

Some developers require that you take your time in 2 different time periods each year (usually high season and low season). This is fine if you expect to travel to Paris twice each year. Otherwise, factor in the additional cost to travel to Paris just to be able to use that extra time.

Summary

If you get the answers to these questions and feel comfortable with the answers, then you have done your homework.